Q3 2022 Amcor PLC Earnings Call
Good day my name is Savannah, and I will be our conference operator for today at this time I would like to welcome everyone to the Amcor third quarter of 2022 results Today's conference is being recorded.
But I'm probably on mute to prevent any background noise and after the Speakers' remarks, there'll be a question and answer session. If you would like to ask a question during this time.
Star one on your telephone keypad.
Draw. Your question. Please press star one again, thank you and I would now like to turn the conference over to Tracey Whitehead Global head of Investor Relations. Please go ahead.
Thank you operator, and welcome everyone to our March quarter earnings call for fiscal 'twenty. Two joining today is Ron Delia Chief Executive Officer, and Michael Casamento, Chief Financial Officer, before I hand over to them. Let me note a few items on our website <unk> com under the investors section you will find today.
The press release and presentation, which will be discussed on the call.
Please be aware that we will discuss non-GAAP financial measures and related reconciliations can be found in the press release and the presentation remarks will also include forward looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause future results to differ.
Current estimate please refer to our filings on the SEC website or on our own website for further details.
During the question and answer session. We request that participants asked a question and then rejoin the queue for any additional questions with that I'll hand over to Ron.
Thanks, Tracey and thanks, everyone for joining Michael and myself today to discuss <unk> financial performance at the end of the third quarter, we will begin with some prepared remarks before opening.
For Q&A.
And since safety is our first and most important value will start on slide three with safety as we do.
Every meeting at Amcor and.
And we believe our ultimate goal of zero injuries is absolutely possible and we continue to make good progress.
So far in fiscal 'twenty, two we've reduced the number of injuries across the company by 5% compared to the prior year and more than half of our sites have been injury free for at least 12 months.
Of course this quarter, our attention has turned to the tragic and devastating war in the Ukraine.
We moved quickly to close our Ukraine, signing khaki is before the start of the invasion to protect our local team and we continue to support those co workers and their families in any way, we can including through direct financial support and by assisting those who've been displaced.
All up we have contributed more than $1 million to vital humanitarian relief efforts.
We also announced our decision to scale down our operations in our three Russian sites and to explore all strategic options for those plants.
Our path forward, we will continue to be guided by our values and by our responsibilities to all of our stakeholders I'd like to publicly. Thank all of my input colleagues, who are contributing from near and far to this challenging and upsetting situation your commitment caring and generosity has been an inspiration.
Turning to our key messages for the quarter on slide four first the business delivered another strong result, with the March quarter, representing our strongest period of sales and earnings growth for the fiscal year so far.
Second our teams have continued to demonstrate an exceptional ability to remain focused on managing sales mix and inflation, while delivering for our customers.
Third given the strong execution and consistently strong earnings growth through the year, we've raised our guidance for fiscal 2020 to EPS growth.
And finally <unk> has established a strong foundation for growth and value creation over the last several years and we are increasing capital investments in priority segments and geographies as well as in our innovation capabilities.
Turning to the financial highlights on slide five.
March quarter performance was strong across the board and I'll start with a few highlights.
Net sales grew 16% in the third quarter, including more than $450 million of incremental price increases related to the pass through of higher raw material costs.
Excluding this pass through organic sales growth was 5% in both the flexible and rigid packaging segments.
Consistent with the first half we continue to benefit from favorable mix as well as actions to anticipate and recover higher levels of inflation than we've seen for many years.
This topline growth converted into adjusted EBIT growth of 9% in the quarter.
Flexible segment delivered EBIT growth of 10% and in line with our expectations rigid packaging return to earnings growth after experiencing a unique set of supply chain challenges in the first half as.
As you see on the bottom of the slide this strong March quarter builds on our solid first half so that on a year to date basis net sales have increased 13% adjusted EBIT has increased 6% and adjusted EPS is up 11%.
And our financial profile remains strong and we continue to increase cash returns to shareholders, we expect to repurchase $600 million of shares this year, which when combined with our annual dividend means we anticipated returning around $1 $3 billion of cash to shareholders in fiscal 'twenty two.
Before I hand over to Michael I want to come back to a slide we presented last quarter, which touches on our priority segments.
Amcor has a leading position in each of these categories, which collectively generate over $4 billion in annual sales and share a few common features including large addressable markets higher than average growth rates and significant room for amcor to grow and differentiate.
By making deliberate choices to focus on these high value higher growth categories over time, they will represent a higher proportion of our sales mix contribute to consistent margin expansion and become an increasingly relevant driver of earnings growth for amcor and.
And we've seen this trend so far this year in both flexible and rigid packaging, including in the March quarter, and we expect this will continue as we allocate more capital and resources to these segments, you'll hear more about these mixed benefits from Michael as he provides some more detail on our financial performance.
Yes.
Thanks, Ross So I'll begin with the flexible segment on slide seven the businesses continue to perform very well through the year.
Executing to recover higher raw material costs managed general inflation.
Improved cost performance and deliver increasing mix benefits.
Reported year to date sales grew 11% and 14% in the March quarter.
This includes significant recoveries of higher raw material costs, which increased to $330 million in the March quarter, representing 13% of growth and $1 $3 billion on an annualized basis.
The overall price cost impact has remained manageable headwind headwind through this inflationary cycle given the diversity of materials, we buy the multiple regions in which we consume those materials and implementation of a range of pricing actions across the business.
Excluding this raw material impact sales grew 3% year to date and 5% in the March quarter and as Ron mentioned. This performance reflects our continued focus on managing mix to drive growth, particularly in priority segments like healthcare pet food in premium coffee, where we have seen mid single digit growth year to date.
Supply chain disruptions have had a dampening effect on our volumes in certain high value categories through the year and in parts of the business. We have taken action to direct constrained materials to their highest value use which further enhances mix.
As a result year to date in March quarter volumes across the flexible business were in line with last year.
In terms of earnings adjusted EBIT growth of 8% on a year to date basis and 10% for the March quarter reflects strong price mix benefits and favorable cost performance.
Margins also remained strong at 13, 1%, despite an adverse impact of 140 basis points from the mathematical impact of pass through pricing for higher raw material costs.
Turning to rigid packaging on slide eight the key messages today are that underlying demand remains elevated and the business return to earnings growth in the March quarter in line with our expectations.
Year to date sales grew by 19%, which includes favorable pricing to recover higher raw material costs of 14% and.
Organic sales growth reflects 3% higher volumes and price mix benefits of 2%.
In North America year to date beverage volumes were up 2% hot fill container volumes increased 6% in the March quarter, and 2% on a year to date basis, which reflects continued growth in key categories like isotonic and juice.
Hot fill containers as a high value priority segment Franco why we see significant opportunities to differentiate and over a multiyear period, our ability to leverage technology design and PCI handling capabilities has enabled us to deliver compound volume growth of 4% and consistently improved mix.
Especially container volumes improved sequentially in the quarter.
But remain below last year on a year to date basis with the prior year benefiting from a strong first half in the island personal care category.
And in Latin America, the business delivered strong double digit volume growth on a year to date basis, reflecting strength in Argentina, Mexico, Colombia and Peru.
In terms of earnings the North America business was adversely impacted in the first half by inefficiencies and higher costs, resulting from industry wide supply chain complexity and disruptions as well as capacity constraints.
However, operating conditions and financial performance improved in the March quarter, where the rigid packaging business delivered adjusted EBIT growth of 4%.
We expect this improved performance to continue through the balance of fiscal year 'twenty two.
Moving to cash on the balance sheet on slide nine.
Free cash flow in the March quarter was $75 million higher than last year, which was a pleasing outcome in the context of continued raw material inflation.
On a year to date basis cash flow of $263 million is below last year, primarily due to unfavorable working capital outflows relating to higher raw material costs as well as some planned inventory increases across the business we.
We continue to maintain a strong focus on working capital performance, which is even more critical in an inflationary environment and are rolling working capital to sales ratio remains below 8% and in line with last year.
Notwithstanding current high working capital requirements, we have ample capacity to increase capital investment in strategic growth initiatives.
Ron will provide some more color on this shortly but for fiscal 'twenty. Two we expect capital expenditure will be approximately 15% higher than the prior year and year to date, we are tracking in line with that expectation.
Our financial profile remains strong with leverage of three times on a trailing 12 month EBITDA basis, which is where we would expect to be at this time of the year given the seasonality of cash flows.
And we continue to increase our cash returns to shareholders. So far this year, we've repurchased $423 million.
<unk> worth of shares and expect this will reach $600 million by year end and our quarterly dividend per share of <unk> 12 is also higher than last year's dividend.
Taking us to the outlook on slide 10 gives.
Given our strong March quarter and year to date performance, we are raising our outlook for adjusted EPS growth to nine 5% to 11% on a comparable constant currency basis.
This represents an EPS guidance range of approximately 79 five cents to <unk> 81 per share on a reported basis, assuming current exchange rates prevail for the balance of the year.
We expect significant free cash flow for the year of approximately $1 1 billion, which includes the adverse impact of higher raw material costs on working capital.
It is also important to note our fiscal 'twenty two guidance assumes no further earnings from the business in Ukraine in the final quarter and takes into account a range of possible outcomes in Russia.
As a reminder, the full sites in Ukraine, and Russia combined represent approximately 2% to 3% of Ampco has annual sales approximately 4% to 5% of annual EBIT and approximately $2 million to $300 million on the balance sheet.
So in summary from me today the business has delivered another strong result, as we remained focused on driving value by delivering for our customers managing mix and recovering general inflation and higher raw material costs and a strong execution gives us the confidence to raise our guidance for the 2022 fiscal year <unk>.
With that I'll hand back to Ron.
Thanks, Michael before turning over to Q&A I'd like to spend a few minutes on the longer term starting with our investment case on slide 11, we've maintained a consistent strategy. That's guided how we've evolved our portfolio over the years. So that we're the clear global leader in most of our chosen segments within the primary packaging space for fast moving consumer goods and health care products.
We are absolute and relative scale advantages and a strong track record of earnings growth margin expansion significant and growing free cash flow of over $1 billion, each year and maintaining a strong investment grade balance sheet and that cash flow and balance sheet strength enable us to step up investments for growth to drive increased momentum in the business at the <unk>.
Same time, we have the capacity to return a significant amount of cash to shareholders in the form of regular share repurchases and a growing dividend, which currently yields around 4% or double the average of the S&P 500.
We continue to see no shortage of high quality organic growth opportunities across the three areas that we've highlighted in previous quarters, and which are shown on slide 12.
I already mentioned priority segments, and Michael's comments highlighted the mix benefits that are important are an important driver of earnings growth.
We also have a leading and well diversified emerging markets portfolio, which we expect will grow at mid single digit rates over the long term and innovation is increasingly a clear differentiator and growth driver for amcor, particularly as it relates to the development of more sustainable packaging such as the groundbreaking global product platforms shown on this slide.
<unk>, including amyloid and Sky and am fiber.
And slide 13 is a double click on it and Prima. Another example of our global product platform that sets us up as the partner of choice for customers as we work together to meet our mutual sustainability goals.
<unk> is a family of packaging solutions that are designed to be recycled and deliver significant sustainability benefits without compromising critical performance features including heat resistance high barrier transparency and run speed.
Over time, we've introduced second and third generations of prima expanding the number of end market applications, and adding recycled content options for certain products and the material structure is now prequalified by the how to recycle program in the United States.
Volume growth is now increasing rapidly as some of the most recognizable global brands begin to move from qualification and trial into commercialization and.
<unk> is also a great example of a revenue of a revenue synergy unlocked by the Bemis acquisition <unk>.
Capacity was first implemented in Oshkosh, Wisconsin, with some capacity allocated to other regions to see demand and as volume commitments have grown we've scaled up adding capacity in Europe and soon in Latin America as well.
Moving to slide 14 and to dimension, the increasing investment we referred to a few times and to bring it to life with some more examples we've been stepping up capex by around 15% per year, including in the current 2022 fiscal year as Michael mentioned and we expect this will take our capex to sales ratio from the 3% to 4% range historically.
The 4% to 5% on an ongoing basis, we have a number of projects already underway or nearing completion, which will generate attractive returns and drive organic growth going forward and this slide showcases a few examples.
In Brazil, and in the United Kingdom, we are adding multi layer film capacity to serve growth in the priority healthcare and meet segments in.
In Ireland, we are adding new state of the art thermal forming capabilities to strengthen our leadership position in medical packaging and in Italy, We're adding production capacity for one of our global product platforms, <unk> flex and since launching this recycle ready pouch for reportable applications, we've seen significant interest from a long list of customers.
And the majority of this new capacity is already sold out.
Just a few words on our broader sustainability agenda on slide 15.
Better package design like amyloid and am Prima, which takes into account the full product lifecycle as a critical element of responsible packaging, but achieving the type of lasting large scale impact we envision requires broad cooperation with expert partners from across the value chain.
One way we've been most impactful is by bringing our capabilities to the table as standards are developed to make circularity the norm.
Through the consumer goods Forum Amcor recently contributed to the development of principles for advanced recycling technologies, which can play a critical role in reducing the environmental impact of hard to recycle plastic waste.
We're also actively contributing to the changes needed in waste management and recycling infrastructure by creating demand in April .
We announced a partnership with Exxonmobil, providing us access to their advanced recycled materials, which can be used in health care and food packaging applications. We have similar agreements in place with multiple suppliers and as we increased our use of recycled materials. The carbon footprint of our products is also reduced.
And that reduction combined with ongoing efforts to make our own operations less energy intensive sets us up to achieve our net zero ambitions, which we announced earlier this year.
To summarize on slide 16 amcor.
<unk> delivered another strong result, with the March quarter, representing the strongest period of sales and earnings growth for the year, we continue to manage well through inflation and improvements in our sales mix, while delivering for our customers.
With strong year to date performance and good momentum we've raised our guidance for fiscal 2020 to EPS growth and looking over the longer term. We have built a strong foundation for value creation, and we're stepping up our investments to drive growth margin expansion and long term value for shareholders.
That concludes our opening remarks, operator, we'll now open the line for questions.
And again that is star one if you would like to ask a question I would like to remind participants to limit to one question and you rejoin the queue for any follow ups I will pause for a moment to compile the Q&A roster.
Yes.
Okay.
And our first question will come from Anthony Pettinari with Citi.
Please go ahead.
Hi, This is actually Brian Bird Meyer sitting in for Anthony.
So you raised the EPS guidance, but free cash flow guidance moves towards the lower end of your range.
Is that delta driven by working capital impacts from resin costs.
Is there anything else that we should be mindful of in regards to your updated free cash flow guidance, such as capex or payables or receivables.
Yeah, I'll take that one it's Michael here look the bottom line is its all working capital related.
And the impact the reason we're at the lower end of the range, there and still holding to the range.
<unk> is really around the continued escalation in raw materials that we didn't stay at the beginning of the year.
And I say through the year, we've seen that continue.
We're holding our working capital to sales ratio, so thats, a really pleasing through the year as with managing working capital and a great way sub 8%, but just from a pure sales revenue increased.
Annualized basis, it's going to be like in that $1 5 billion range that just that just means you've got a $120 million impact on working capital outflow from that from that raw material increase.
Other than that nothing else.
Everything else is in line as we expected.
And our next question question will come from Keith Chau with MST.
Please go ahead.
Colorado, Michael just a question with respect to guidance on the Russia, Ukraine issue, Ron you mentioned the range of outcomes for <unk>.
What could happen in Russia can.
Can you give us a bit more detail than.
In that respect and also if you could address.
Some of your peers or at least customers.
Saying that they would forgo profitability in the region given what's happened.
Is that part of the range of outcomes that you're exploring at the moment for Russia. Thank you.
Yes, just to dimension the Ukrainian position in Russian business as Michael alluded to we've got four sites in that region, one in the Ukraine and three in Russia.
About 1000 people working on those and those four sites.
The Russian and Ukrainian businesses combined generated about 2% to 3% of sales, 4% to 5% of EBIT and as Michael pointed out $2 million to $300 million of balance sheet.
The Ukrainian sites being closed obviously, our first priority has been keeping our people safe as it always would be you'd expect and so we closed the site in the Ukraine just before the invasion started.
We were able to get our people safely out of that area.
The Russian plants are continuing to operate.
We are well aware there is a number of public announcements that customers have made and I would remind you that our business in Russia is focused exclusively on a very small number of multinational customers.
All of whom despite whatever the public announcements.
Have been and continue to operate there and so we continue to support them, while we explore our own options.
Look our options range from continuing to run the business too.
Every other possible extreme that you can imagine.
Our tendency in our history has never been to be overly prescriptive about strategic moves like that so I think wed ask you to wait and see and view our actions more so than.
Anything that we might say in advance and as far as the guidance impact clearly the Ukrainian sites not running the.
The Russian plants are running at different different degrees of utilization and that's all factored into the EPS range that Michael outlined.
Our next question will come from George Staphos with Bank of America.
Please go ahead.
Thanks, very much hi, everyone. Good day, thanks for the details and calculations on the quarter.
Ron I was hoping you could talk a little bit about the flexible business and go through a bit more than drivers in the quarter. Overall I think you said volumes were relatively flat, even though it looks like European flexible accelerated in the quarter, while North America stayed in a low single digit range.
Im correct, what drove the European export acceleration and it looks like Asia decelerated to maybe a flatter down in Latam remained down into the mix is good.
Can you.
Say, whether that was in fact, the case and talk about the drivers.
And so in the end markets in those regions and countries as well thanks very much.
Yes look I think the business is performing really well. So we had 5% organic growth sales growth across the business on relatively flat volumes in and converted that to 10% EBIT growth.
Across the segments. So we're really pleased with the profit conversion.
North American business continues to grow the sell organic sales growth is mid single digits with some volume growth in the low single digit range.
The European business in the quarter had a slightly higher organic sales number is still in the mid single digits, though on volumes that were modestly down which I'll come back to.
And then the organic sales growth in the two emerging markets businesses was was up.
Now with regard to North America, and Europe were particularly pleased with the performance of both of those businesses with two larger businesses in the quarter and in particular because of their management of mix.
Mix as you know from from.
Well, a long period of time and <unk> has been a key driver of profit.
Expansion over over many many years and it's a function of orienting our portfolio more and more towards higher value segments.
And higher value products, and that's exactly what we've seen in the quarter. So in Europe , we saw a trade out of lower margin.
<unk> that are more intermediate in nature into other converters, and we used constrained raw materials to support some of our higher margin segments and pharmaceuticals.
Medical device packaging pet food coffee.
And some of the segments that have been.
<unk> for us for many years.
That's really that's really the story of the quarter. It was really very much about mix.
And our next question will come from Jon <unk> with Macquarie.
Please go ahead.
Did I, rather Michael how are you.
Hi, John .
Just in terms of.
Yeah.
Raw materials and any impacts on demand you continue to do a good job of it.
We're covering high raw material costs, and I think that's true of the sector as well a lot of this is being passed on to the customer and now we've got another leg in commodities. So I'd just be interested in any demand destruction that youll seeing in end markets and are you concerned about.
Talk to us.
<unk>.
Well listen John we're concerned about inflation generally like everyone else.
Our space given that we're exposed to consumer staples and healthcare products historically, we've not seen a high degree of demand elasticity.
And I think so far if you take the comments from other public companies through this quarter.
There hasnt been very much <expletive>.
Demand impact from the prices that have been taken across the segments we're exposed to.
I think most customers that are reported and have commented on the topic has said that they have seen less demand elasticity than they expected and also less than they've seen historically.
So so far we've not seen a demand impact.
And our next question will come from Adam Samuelson with Goldman Sachs.
Yes. Thank you good evening everyone.
I was maybe hoping to dig a bit more on on the mix benefits from the Purion. Ron you talked just kind of alluded to.
Prioritizing certain customers and.
The health care segment in particular, and just how do you think with the durability of those benefits and if we promise cereal availability improves over the next year.
Do you think Theres still net margin benefits from the volume you'd be recapturing or how do we think about the margin tailwind or headwinds at my presented the fiscal 'twenty three because you seemingly.
Pretty changed pretty notable shift in your product mix in the period.
Yes look at them. It's a good question. If you go back and look over a long period of time at Amcor. The margin expansion period on period has been very consistent in this I'm talking about a five or 10 year.
View, you'd see consistent margin expansion, regardless of the raw materials cycle anywhere from 10 to 30 basis points in a given period when we're in more steady steady.
Steady state environment absent any major M&A and a big part of that margin expansion story has been the strategy. We've had in place for a long time to constantly optimize the mix both the product mix the segment mix in the customer mix.
That's been the focal point for our commercial teams for a long period of time and Thats going to continue going forward as far as.
Where to from here, we don't expect that mix improvement impact to slow while we do hope is that raw materials become more plentiful and more available and we can satisfy all of the demand that we have I mean, we're still in an environment, where certain materials are constrained and we still have probably foregone in the low single digits of volume grow.
With for lack of raw materials. So if we if we look forward, we would hope that that normalizes in the mix improvements will continue as they have for a number of years now.
And our next question will come from Larry <unk> with credit Suisse.
Please go ahead.
Hi, Thanks, guys.
My question is on the Capex guidance Ron.
Thank you said, yes.
3% to 4% for the was it 4% to 5% for the foreseeable future.
And.
I can understand.
At the current point you are building quite a few factories are that it's four to five now.
But I'm just wondering are.
How are you thinking that philosophically the business needs to invest more organically and maybe you can rope into that perhaps the acquisition.
Pipeline for quite some time might be something youre thinking it won't be too active.
Yes look Larry yes, just to be clear.
Pointed to the historical range of 3% to 4% of sales and what we've said is that expect that that will be more in the 4% to 5% of sales range going forward and it's a function of a couple of things firstly the opportunity set as rich as the portfolio has evolved in a lot of it is through what we picked up in the Bemis acquisition and flexible and as the <unk> portfolio.
Has evolved.
Into the more specialty space.
We just have more organic opportunities than we've probably ever had.
So that's the starting point and when I say, good organic opportunities I mean, those where we can deploy capital and generate an attractive return.
For shareholders. So that's the starting point secondly.
The business is generating more and more cash flow.
It is increasing its cash generation capacity, especially as we come through the integration here if you will.
And as.
We look at alternative uses for that capital we have we believe an ability to balance funds.
Funding the organic growth that we see.
Continuing to.
Pursue acquisitions or buying back shares in the absence of acquisitions, and then obviously, maintaining a pretty healthy attractive dividends. So we just feel like the cash generation is sufficient now to support.
All of those potential drivers of shareholder returns in the organic growth opportunity set has just never been never been more robust.
And our next question will come from Mike Rosslyn Vouchers Securities. Please go ahead.
Thanks, very much hi, Ron Mike Tracy Congrats on the corner.
Just one quick question regarding the volume growth given the Mr materials constraints.
Obviously negatively impacted volume can you comment on any potential reengineering of reformulation of your products to get.
The necessary finished products or revised finished products qualified into customers anything that you pursue your reformulated during the quarter or had been doing year to date two to adjust towards who account for this material.
Yes, it's a great great question, Great observation I mean, you can rest assured we are doing everything we can to find viable alternatives. When materials are just constrained I think that we have an advantage in that we're a large scale buyer and we're buying materials in multiple regions. So.
The first thing we do when we run into any kind of a constrained as we look to source the material from another region.
So we've been able to tap into our global network and our global footprint to I think navigate the situation quite well, but there are times. When there is just no material available globally.
And Thats why in parallel we're looking at re formulations wherever possible.
Those typically did not happen quickly and.
And I think.
There's nothing I can point to in the quarter that's material enough.
But there is plenty of activity in terms of qualifying alternative materials and looking to reformulate away from materials that have been more prone to outages.
And our next question will come from Nathan Reilly with UBS.
Please go ahead.
Yes, Thanks for taking my question I'll, just interested Ron how.
How much headroom have you gone to consume media plant capacity utilization at the moment. Obviously appreciate you being somewhat volume constrained as well recently, but I'm also just curious to understand what type of volume up you'd be expecting to see from the increased investment in capex that you're flagging going forward.
Look Nathan it's a broad network and the capacity utilization will vary across the business quite dramatically. So.
The extreme you have our rigid packaging business in the beverage space.
Which has been sold out for a long period of time now for several quarters.
We're adding capacity, there, which is which is.
Just to satisfy the continued elevated demand, we see in <unk> and beverages.
In the flexible segment, we see very high utilization for the assets that are directed to the more sustainable products that we make some of the global product platforms that I alluded to in the prepared remarks.
But.
We will be adding capacity and that capacity will help support the volume growth.
The expectations that we have going forward, which have traditionally been in the low single digit range.
And our next question will come from Ghansham Panjabi with Baird.
Please go ahead.
Thank you good day everybody.
And just as a follow up to some of the early questions.
Maybe you can give us a sense as to which specific raw materials, you're still short on and how do you. How do you see that sort of evolving over the next couple of quarters and then just bigger picture I mean, the current environment, obviously extraordinary for the entire supply chain and no one really knows how the consumer is ultimately going to react to all these inflationary inputs and so on just curious Ron in terms of.
How you service your customers and how you go to market is there anything that you noticed that's different in terms of what your customers are sort of asking you what now versus in years past just given the nature of the current environment. Thanks.
Yes look on the materials that are short I mean, it's been a bit of a whack a mole game to be honest with you in terms of where we're short which material in which region.
In which month or which week I guess, you could say and.
More often than not it's been some of the specialty materials and a flexible and rigid which are additives to the primary materials. So it has not been.
To a large extent for quite some time now it has not been the base polymers that we that we buy the big commodities like polyethylene or polypropylene. We did have some shortages in <unk> for a while but those have abated.
It's been more of the specialty materials that are added to provide barrier or some other property that's required to deliver the full functionality.
Of the package.
Which have really been.
Highly volatile aluminum to some extent I guess would be the other main commodity which at times has been.
In short supply.
Look I think this too shall pass I mean, there is there is no reason why we should expect.
Indefinite outages, but at the moment, it's just been continued volatility.
And our next question will come from Richard Johnson with Jefferies.
Please go ahead. Thanks very much. Thank you very much run my question is on on rigid plastics and one of the major fact.
Your major competitor in the U S talks about resin being something of a 40% of the cost of sales is that the same for you and probably more patents can you. Please about 60% of non raw material cost and given and provide whatever detail you can on the inflationary patients in that in that part of your cost basket. Please.
Yes, I'll talk about the Cogs in rigid packaging and maybe Michael can talk about the inflation, we've seen generally because we've talked a lot about raw materials, but inflation more generally is obviously.
Front and center.
The rigid packaging business I'm, not sure who the competitors, but the resin component of Cogs is actually higher in Richardson and it is.
In flexible and I would have said, it's probably in the 60% to 70% range.
And Thats as you know a straight pass through that's linked to the commodity index, either PT or one of the olefins.
But as far as general inflation goes Mike wanted to comment on what we're seeing yes look I think generally inflation across the globe.
We are seeing increases is predominantly in energy and freight.
And it varies by region, but.
In <unk>.
We're seeing inflation there in the range of kind of 15% to 20%, but the point to remember is that those elements of our Cogs are quite small low single digits.
So we're adding front of that some of that we can pass through to customers out of other parts of that we've got to take price and we are adding front.
Across the globe working our way through that to recover those increases.
That we're seeing in general inflation on those two items tens of labor.
It's been more supply than I guess labor wage rates for us. So you know we've had disruption in labor, particularly in North America.
In Europe .
Around COVID-19 and the like which we've had to deal with.
And we've seen some elevated overtime and other other labor costs associated with that but.
Again being manageable.
We haven't seen the rate increases, although we are expecting some of those to start to come through.
And our next question will come from Kyle White with Deutsche Bank.
Please go ahead.
Hey, Thanks for taking the question I know your exposure to China is relatively limited, but just curious what impact you've seen from the lockdown situation. There on your production and demand in that region and what did you assume in your outlook going forward from that situation.
Yeah look China is a big important business for us about 5% of sales. It's a business, it's our largest emerging market business. We operate the flexible packaging segment there so.
So it is not rigid packaging doesn't participate in China.
And it's a business that's been growing.
Healthy rate for the last several years.
First half as well, we had kind of mid single digit.
And bottom line growth, it's also a very profitable business.
We have a national footprint, there with with 10 or 11 factories across the country.
But importantly, it's essentially a China for China business. So, we do very little importing or exporting in and out of China.
The third quarter was a little bit slower I think primarily because we're cycling an incredibly strong third quarter last year, which.
Probably had to do with the timing of Chinese new year as much as anything else, but our business was was.
Flat to modestly down in the third quarter. Our April definitely slowed in April I would say is where we started to see some impacts of the lockdowns and not so much on our operations.
But in some of our customers.
That's where they werent able to operate for periods of time, we definitely saw a slowdown.
In April and honestly, it's very difficult to tell what March or June .
Sure.
Portends, so our guidance range from an EPS perspective includes a.
A range of outcomes on China.
Although bear in mind, we're down to two months and we know the outcome for April So I think we feel pretty comfortable with the range and the consideration we've given to the dynamics in China.
And again that is star one if you would like to ask a question. Our next question will come from James.
With Jarden Australia. Please go ahead.
Hi, guys. Thanks for taking my question.
Wilsons is Fannie and projected honest from Jonathan if we back out the $120 million of raw material impacts from U 200 million working capital build over the quarter beyond seasonality, what's giving you confidence that this will unwind in the fourth quarter, especially given that your guidance remains unchanged and also just on that are you able to tell us what this inventory buildup is declaring more enriched.
Thanks, guys.
Yeah, Hi, John Thanks for the question I'll take that one yes look what we've seen.
Actually year to date and working capital is about a $200 million.
Outflow versus prior year and about half of that is is price. The other half is is building raw material.
Building raw material and finished goods this year, particularly we have been able to build.
Some inventory in the rigid packaging space, which we werent able to do last year and that's ahead of the heavy season in Q4, which is typically what we would normally say we would normally see inventories build.
Leading into Q4, so that's part of it in addition to that in the flexible space and across the board.
Also.
Conservatively increased some inventories, particularly in some of the.
Products, we've had shortage of supply on so we'd expect that that is going to unwind that component of the <unk>.
Inventory increase he is going to unwind in Q4, as we cycle throughout all our busiest quarter of the year. So that's how we factored that into our full year guidance.
Our next we have a follow up from George Staphos with Bank of America.
Please go ahead, hi, guys. Thanks, Chris. Thank you very much thanks for taking the follow on guys you.
You had talked about increasing your growth investments and you cited.
Regionally, where youre, putting various projects one given summit and Michael some of the volatility that we've seen over the last couple of years.
Would that perhaps change where youll put the next growth investments in high value investments are really.
It doesn't really affect where you might put either a coffee line or a high barrier align our personal care line and are you at all raising the required rates of return given the volatility that we've seen in some of these markets again, either for geopolitical or from macro reasons. Thanks, guys and good luck in the quarter.
Yes, Thanks, George its a really good question I mean, you throw in intellectual property protection into the mix and we've always had different criteria or differentiator criteria I should say for where we put capital and differentiated return expectations.
For any capital project.
The good thing about our business is that the incremental capacity is is small as a percentage of the total capital that we will deploy in a given year. So if you can imagine that.
Our capital spending will be 500 $550 million something like that.
Our new.
Even a new plant to produce one of the platforms that I've talked about might be in the 2000 $30 million range.
So none of the projects that I was alluding to earlier with the exception of the new plant, we built in China, which is a little bit more now.
None of them are really substantial portion of our overall capital spend in any one year and so what that does is creates a portfolio effect across the different investments that we make which in and of itself is a risk mitigation.
Methodologies.
Allergy if you could if you could think about it that way.
And our next question will come from Larry <unk> with credit Suisse.
Please go ahead, Hey, Ron.
Thanks, guys.
My obligatory ESG question, but run the U S.
<unk> I think.
Viewing the waste and packaging directives looking at table, a new bill into the European Parliament and I think it is going to evolve.
And producer or end user recycling schemes like container deposit.
To that but for flexible.
Just wondering if.
You guys are sort of.
Reviewing that situation and what we'd go sort of schemes need for converter.
Yes, there's a lot of legislation in play in Europe , and in the United States and elsewhere in the world.
We're across all of it Larry as you could expect we provide comments were often consulted.
For perspectives, which we provide both directly and through the various associations and affiliations that we have.
Generally speaking.
We see these these regulations as innovation opportunities and ways to further differentiate and Ed add and create value to our customers in many cases, where there is an extended producer responsibility.
Jim or plastics tax or something of that nature, there's an eco modulation component which means.
The fee that the brand owner ultimately the consumer will pay.
Can be reduced if the package or the product overall has a lower environmental footprint. So that creates an opportunity for us to add more value to our customers as they as they deal with these regulations.
And generally speaking if its a well constructed EPR, where the industry has some control over the.
The framework and where the funding goes back to the waste management infrastructure, we're supportive.
We're certainly not supportive of general revenue raising <unk>.
Texas and things like that but we are well structured.
Frameworks are in place, we're certainly supportive.
And our next question will come from Andrew Scott with Morgan Stanley .
Please go ahead. Thank you. Thank you hi, Ron.
With the flexible business, you've spoken about targeting focusing your capacity towards higher value customers, which obviously makes perfect sense just interested.
As we go forward and capacity comes back do you say all of those customers coming back into the mix. So I'm wondering if it would see yourselves doing some bottom slicing, which is something you've done historically very well.
Yes look I think to the extent that we will have better differentiated products.
We'll be able to capture any portion of the market that we've not been able to satisfy more recently.
There is an element of bottom slicing in the mix outcomes that you've seen even in the most recent result.
Out of necessity for lack of raw materials, but look I think.
We are in the business to sell and sell more units then rather than less and at the moment. The limiting factor has been raw materials that will lease that will least overtime.
And that will conclude today's question and answer session and I would now like to turn the call back over to Ron.
For closing remarks.
Okay. Thank you operator, thanks, everyone for joining today and for your interest in Amcor, We've had a strong quarter. We've had a strong first nine months of the fiscal year and have increased our expectations.
For the run home to the finish.
Thanks for your interest and we'll speak to you all next quarter.
And this will conclude today's conference. Thank you for your participation and you may now disconnect.
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